Income Tax Appellate Tribunal - Kolkata
Asstt. Cit vs Balarampur Chini Mills Ltd. on 9 March, 2007
Equivalent citations: [2007]109ITD146(KOL), [2008]297ITR15(KOL), (2007)111TTJ(KOL)230
ORDER
Jugal Kishore, Accountant Member
1. The appeal preferred by the revenue is directed against the order passed by the learned Commissioner of Income Tax, Central-11, Kolkata dated 31-3-2006 for the assessment year 2004-05 on the following grounds :' (1) That on the fact and in the circumstances, the learned Commissioner (Appeals) erred in law in directing to allow deferred tax to determine book profit under Section 115JB of the Income Tax Act, 1961, when the said deferred tax is not deductible under the provision laid down in the Parts II & III of Schedule VI of the Companies Act, 1956 for preparing final account as per that Act.
(2) That on the fact and in the circumstances, the learned Commissioner (Appeals) erred in law in directing to allow deferred tax to determine the book profit under Section 115JB of the Income Tax Act, 1961, when the deferred tax is a provision of tax effect of the differences between taxable income and accounting income, and so is not allowable under Section 115JB of the Income Tax Act, 1961 in determining book profit under that section.
(3) That on the fact and in the circumstances, the learned Commissioner (Appeals) erred in directing to allow deferred tax in determining book profit under Section 115JB of the Income Tax Act, 1961, when the accumulated provision of deferred tax is reflected in liability side of balance sheet and thus forms a reserve to meet future liability of tax.
(4) That on the fact and in the circumstances, the learned Commissioner (Appeals) erred in directing to allow tax paid under Section 115-O of the Income Tax Act, 1961 on distributed dividend to determine book profit, when the assessee had not filed the claim in the original return, revised return or in the revised computation filed during assessment.
(5) That on the fact and in the circumstances, the learned Commissioner (Appeals) erred in directing to allow tax paid under Section 115-O of the Income Tax Act, 1961 on distributed dividend to determine book profit under Section 115JB of the Income Tax Act, 1961 citing CBDT's Circular No. 8 dated 29-8-2005, when the said circular relates to Fringe Benefit Tax, not on tax on dividend.
(6) That on the fact and in the circumstances, the learned Commissioner (Appeals) erred in directing to allow tax paid under Section 115-O of the Income Tax Act, 1961 on distributed dividend to determine book profit under Section 115JB of the Income Tax Act, 1961 citing CBDT's Circular No. 8 dated 29-8-2005 without considering the fact that tax on fringe benefit is a charge on business expense and tax on dividend under Section 115-O is not a charge on business expense, and, therefore, not allowable to determine book profit under Section 115JB of the Income Tax Act, 1961.
2. The first three grounds raised by the revenue relate to the deletion of addition by the learned Commissioner (Appeals), which was made by the assessing officer by adding the amount of deferred tax under Explanation (c) of Section 115JB(2) for arriving at the book profit. The assessing officer while adding the amount of deferred tax observed as under:
The main issue appeared during the hearing in respect of computation MAT that deferred tax amounting Rs. 1,28,19,137 should not be added under the Explanation of Section 115JB. The reasons for the claim submitted by the assessee are (1) that the deffered tax is not income-tax, payable or paid, (2) the amount of deferred tax was not carried to any reserve, (3) the amount of deferred tax was not an amount set aside to made for meeting liabilities, (4) the deferred tax was ascertained, so it cannot be said, it is for meeting unascertained liability.
The issue is concerned. In the Annual Report for 2003-04 the net profit after taxation was stated at Rs. 6,048.57 lakh. The provision for taxation was declared at Rs. 1,887.92 lakhs. In the profit and loss a/c., the provision for tax was stated as below Current Tax ' Rs.
6,069.00 lakh Deferred Tax ' Rs.
1,281.92 lakh Total ' Rs.
1,887.92 lakh In the balance sheet, deferred tax liability (Net) was shown as source of fund. In Schedule 'E' of the accounts a details of def erred tax, the deferred tax is shown as under:
Depreciation on fixed assets
-
Rs. 9,321.21 lakh Less : Expenses allowable for tax purposes when paid
-
Rs. 882.70 lakh Net deferred tax
-
Rs. 8,438.51 lakh The net deferred tax at the beginning of the year (i.e. at the end of earlier financial year) was Rs. 7,156.59 lakh. The difference of Rs. 8,438.51 lakh (Net deferred tax of this year) and Rs. 7,156.59 lakh (Net deferred tax of earlier year) being Rs. 1,281.92 lakh was charged in the accounts as provision for deferred tax.
From the account itself, it appeared that the deferred tax is not actual payment of tax, but, as submitted by the A/R of the assessee, that according to the Accounting Standard 22 of Chartered Accountants, the deferred tax is a provision for Tax effect of differences between taxable income and accounting income. In the balance sheet, the deferred tax was shown as separate entity as source of assessee business fund. The fund, may be used in future in meeting tax liability of tax.
The A/R claimed that, if deferred tax is provision, it was ascertained on scientific basis. So, being ascertained liability it should not be added to the net profit after tax.
In this case, the differed tax is set aside to form a liability to meeting future tax which was not determined during the year, the deferred tax cannot be said on ascertained provision.
In the assessment order for assessment years 2002-03 and 2003-04, the deferred taxes were not considered deduction in computation of book profit for MAT under Section 115JB.
The companies account is to be prepared under Parts II & III of Schedule VI of the Companies Act, 1956. As per Rule 3(vi), below, the profit & loss account shall set out "the amount of charge for Indian Income-tax and other Indian Taxation on Profits, including, where practicable, with Indian Income-tax any taxable imposed elsewhere to the extent of relief, if any, from Indian Income Tax and distinguishing where practicable, between income-tax and other tax.
Nowhere in the Parts II & III of Schedule VI of Companies Act, 1956, the deferred tax is stated allowable to set out in the Profit & Loss account under Companies Act, 1956. Further, deferred tax is charged not due to an Act of Law, but it is charged in the accounts, as per the Auditing Standard 22, of the Institute of Chartered Accountants. Deferred tax is actually provision for tax effect of differences between taxable income and accounting income, and the provision is disclosed in the balance sheet as source of fund under the head 'Deferred Tax Liability'.
In the circumstances, the claim made through revised return, is not accepted.
The assessee being aggrieved with such action of assessing office went in appeal before the learned Commissioner (Appeals), wherein it was submitted that as per Accounting Standard 22 issued by the Institute of Chartered Accountants of India, deferred tax is an expense, which is required to be deducted by a company while computing the net profit for the year. It was further contended by the assessee that book profit as per Section 115JB is to be determined taking into account the net profit i.e. the profit as arrived at after deducting all expenses, taxes, deferred tax, etc. It was contended before the learned Commissioner of Income Tax (A) that in computing the book profit, the adjustments, which are required to be made, have been stipulated in Explanation to Section 115JB by increasing the amount referred to in Clauses (a) to (h debited to the profit & loss account and as reduced by Clauses (1) to (vil) as mentioned in Explanation to Section 115JB(2). The assessee has thereafter submitted that the assessing officer cannot alternate the book profit by making any addition other than the ones specifically mentioned in the Explanation as mentioned in such Explanation in view of the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT .
3. The assessee also submitted that the specified additions to be made to the net profit to arrive at book profit, within which the deferred tax charge to the Profit & Loss A/c. could be covered are as follows:
(a) the amount of income-tax paid or payable, and the provision therefore
(b) the amounts carried to any reserves, by whatever, name called (other than a reserve specified under Section 33AC
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.
The assessee has pleaded before the learned Commissioner of Income Tax (A) that the amount of income tax paid or payable and the provision therefore as referred to in Clause (a) of Explanation to Section 115B clearly refers to current tax liability. Whereas deffered tax liability as per Accounting Standard 22 is not required to be added back for the computation of book profit as deferred tax charge is clearly not income-tax paid or payable. Since such different tax is a tax effect of timing differences, which means the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods and, therefore, the same cannot be considered as a provision for income-tax paid or payable and could not be added back under Explanation (a) to Section 115JB. The assessee also placed reliance on the various dictionaries and authority, wherein the terms, income-tax 'paid' or 'payable' are defined.
4. The assessee thereafter has explained regarding the nature of liabilities considering Clause (c) to the Explanation to Section 115JB(2), which requires the addition of the amount set aside to the provisions made for meeting liabilities other than ascertained liabilities. The learned Counsel has submitted that differed tax is neither a provision nor unascertained liabilities as Schedule VI of Companies Act requires provision to be disclosed separately and had differed tax liability been considered a provision, the same would have been disclosed under the heading 'Current liabilities and provisions'. The assessee has also contended that the differed tax amount is in the nature of provision made for meeting the ascertained liabilities and has pleaded that the matching concept dictates the accounting for deferred taxes, and in accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Giving example the assessee has stated before Commissioner (Appeals) that the tax benefit on provision for doubtful debts is accrued in the books by creating a deferred tax asset though the actual tax benefit would flow through in the tax return when the doubtful debt actually becomes bad. Thus, the deferred tax charge accrues in the same period and is therefore an ascertained liability relating to the same period, though the point of time when tax becomes payable/ chargeable /leviable is postponed. Thus the deferred tax amount is in the nature of provision made for meeting ascertained liability. In support of his above contention, the assessee has relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Echjay Forgings (P.) Ltd. (2001) 116 Taxman 322, wherein it was held that provisio1n for doubtful debt and provision for gratuity based on actuarial valuation represented ascertained liability and hence need not be added back for the purposes of computing book profit under Section 115JB. It was submitted by the assessee before the learned Commissioner (Appeals) that the differed tax charge is not to be added back as amount set aside to the provisions made for meeting liabilities, which are ascertained. The assessee has also relied on the following judgments in support of his contention before the Learned Commissioner (Appeals):
(i) Shree Saijan Mills Ltd. v. CIT ;
(ii) CIT v. United Motors India Ltd. (1990) 181 ITR (Bom.);
(iii) Income Tax Officer v. Wan Son (India) Ltd. ( 1983) 5 ITD 102 (Pune);
(iv) Commissioner of Inland revenue v. Mitsubishi Motors New Zealand Ltd. (1996) 222 ITR 697 (PC).
The assessee also placed reliance on various dictionaries meaning of the word 'ascertain' before the learned Commissioner (Appeals). Apart from the meaning given by International Accounting Standard 12 and Accounting Standard 22 by ICAL
5. The assessee has pleaded before the learned Commissioner (Appeals) that the above provision for deferred tax charge is also not the amount carried to reserve and, therefore, the assessee is outside the ambit of Clause (b) of Explanation to Section 11 5JB(2). It has been submitted that a reserve can be created only if the company has profit, however, a deferred tax charge could arise even if the company is making losses. Apart from the fact that a company can unilaterally transfer the reserve back to the profit & loss a/c. whereas deferred tax charge cannot be so transferred to the profit and loss a/c. The assessee has also pointed out other differences between the reserve and deferred tax charge before the learned Commissioner (Appeals).
6. Finally the assessee has submitted before the Learned Commissioner (Appeals) that any withdrawal from the provision for deferred tax liability would be offered for tax in accordance with the proviso of Explanation (i) to Section 115JB(2). Hence, the revenue would not be worse off (except the timing difference) if the deferred tax charge is not added back to arrive at the book profit.
7. The learned Commissioner (Appeals) after considering the above submission of the assessee has held that there is no justification for adding back the deferred tax liability in the computation of assessee's total income under Explanation (c) to Sub-section (2) to Section 115JB for arriving at the book profit and has accordingly deleted the addition.
8. The revenue is aggrieved with such order of learned Commissioner (Appeals) and has now come in appeal before us on the abovementioned first three grounds of appeal before us.
9. In appeal before us, the learned Departmental Representative for the revenue Shri R.R. Sah has assailed the order of learned Commissioner (Appeals) and has contended that the deferred tax liability is part and parcel of provision for taxes and has submitted that Accounting Standard 22 issued by the ICAI makes it amply clear that this is nothing but accounting for taxes on income. It has further been emphasized by Dr. Sah that Accounting Standard 22 has clearly stipulated the system of recognition of deferred tax liability/ assets and has submitted that these should be identified and ascertained with respect to items of timing difference and where tax liability is postponed, an amount equivalent to such tax liability should be, set apart by charge on revenue or vice versa The learned D.R. for the revenue relying on Accounting Standard-22 has submitted that Accounting Standard-22 provides that deferred tax (assets or liability), which is one of the limbs of expense on tax, should be measured by using the tax rate and tax loss that have been enacted or substantially enacted at the balance-sheet date and, therefore, the quantification of deferred tax is based on reasonable certainity and not at all at the absolute certainity. Therefore, it makes the provision for deferred tax liability as reasonably unascertained liability.
10. The learned D.R. has further stated that Accounting Standard-22 cast an obligation on the company to account for the tax expenses creates two major limbs on this account i.e. current tax and deferred tax. Both of these tax expenses are charged or payable to the statement of profit & loss a/c. for the year, hence assuming but not admitting that deferred tax liability even if having a reasonable ascertained character, is basically provision for income-tax payable arising out of timing difference and, therefore, same is very much within the scope of Explanation to Sub-section (2) of Section 115JB of the Act and, therefore, deferred tax charge is based on the line of income-tax payable, and is required to be adjusted for arriving at the book profit to be taxed as per Section 115JB.
11. The learned D.R. has thereafter relied on the Explanation : (b) below to Section 11 5JB(2), which reads as under:
The book profit means the net profit as shown in the profit and loss account for the relevant previous year under Sub-section (2), as increased by-
(a) ...
(b) The amounts carried to any reserves, by whatever name called (other than a reserve specified under Section 33AC) or
(c) ...
(d) ...
The learned D.R. has also disputed the contention of the assessee before the learned Commissioner (Appeals) that the reserve created by virtue of deferred tax charge is different than reserve as mentioned in Explanation (b) to below Section 115JB(2) as such reserve is not distributed reserve and such reserve may or may not be out of appropriation of surplus profit. It has been submitted by the learned D.R. that the moot point of consideration in this case is to be taken into cognizance is to see whether any reserve has been created and whether the same has been created by debit to the profit & loss a/c. and since in the instant case, the amount of deferred tax liability has been debited to the profit & loss a/c., the same has rightly been adjusted by the assessing officer in view of the Explanation to Section 115JB(2).
12. The learned D.R. has further rebutted the submission of the assessee before the learned Commissioner (Appeals) that the provision for deferred tax liability has to be allowed as statement has been made by the assessee strictly in compliance with the Companies Act which makes it mandatory on the part of assessee to prepare its account as per provisions and Rules given in the Companies Act, which also requires adherence to the Accounting Standard prescribed by ICAI for system and treatment of accounting of individual/ specific/class of actual as well as notional receipts and payments. It has been pointed out by the learned. D.R. that the adjustment prescribed in the Section 115JB is over and above the treatment and accounting of different items of the profit & loss account and balance sheet prepared as per the Companies Act and a plain reading of the provisions under Section 115JB reveals that this is the minimum tax, which Company requires to cope up if net profit in profit and loss a/c. after adjustment as per Explanation under Section 115JB results into a positive book profit and it has nowhere been stipulated in the provision under Section 115JB that accounts prepared in accordance with the Companies Act will not require any adjustment i.e. either addition or deletion. It has been submitted that the provision of Income Tax Act under Section 115JB is overriding on the provision of Accounting Standard/ Companies Act so far as MAT under Section 115JB is concerned.
13. It has, therefore, been submitted by the learned. D.R. that the amount of deferred tax liability debited to the profit & loss a/c. was rightly added back by the assessing officer while computing the book profit under Section 115JB for the reasons that this is not only the unascertained liability but is basically provision for income tax payable.
14. In his rival submission, the learned Counsel for the assessee Shri Ravi Tulsiyan has first reiterated his submission made before the learned Commissioner (Appeals). It has been contended by Shri Tulsiyan that the learned Commissioner (Appeals) after perusing all the relevant clauses as mentioned in Clauses (a), (b) & (c) to the Explanation below Section 115JB has held that provision for deferred tax liability by the assessee was neither unascertained liability nor reserve, which could attract Clauses (a), (b) & (c) to the Explanation (2) below to Section 115JB.
15. The learned Counsel has submitted that provision for deferred tax is not equivalent to a provision for income-tax paid or payable since deferred tax has been defined as the tax effect of timing difference by the ICAI while issuing Accounting Standard-22. Shri Tulsiyan has thereafter elaborated the objective and scope of issuing Accounting Standard-22 by ICAI and has submitted that the above Accounting Standard 22 has been made mandatory by ICAI for all entrepreneurs with effect from 1-4-2002 keeping in view of the necessities of determining the tax liabilities due to time difference. It has been pleaded by the learned Counsel that time differences are the differences between taxable income and accounting income for a period that originate in the one period and are capable of reversal in one or more subsequent periods. Hence, provision for deferred tax is a provision for tax effect of differences between taxable income and accounting income and not provision for income-tax paid or payable. Hence, it is not required to be added back under Explanation (a) to Sub-section (2) to Section 115JB.
16. Shri Tulsiyan has thereafter pleaded that the deferred tax liability created by the assessee is also not an amount carried to reserve within the meaning of Clause (b) to the Explanation below to Section 115JB(2) as reserves are usually shown below the line in the profit & loss a/c., whereas deferred tax charge is shown above the line in the profit & loss a/c. i.e. a charge against profit. The learned Counsel has thereafter reiterated his submission before the learned Commissioner (Appeals) that the reserve as defined in Clause (b) to the Explanation below to Sub-section (2) to Section 115JB is different than deferred tax charge created by the assessee.
17. Shri Ravi Tulsiyan has thereafter submitted that deferred tax charge cannot be considered as covered within the Clause (c) to the Explanation below Section 115JB(2) as such deferred tax charge is not an unascertained liabilities, as deferred tax charge is computed scientifically and as per well established and accepted method in guidance of ICAI It has been pointed out that such scientific method is not only accepted by the accounting professional in India, but being accepted almost globally and since such liabilities are ascertained the same cannot be covered within Clause (c) to Explanation below Section 115JB(2).
18. It has further been pleaded by the learned Counsel that from the creation of deferred tax charge, the revenue would not be worse off as any withdrawal from the provision for deferred tax liability would be offered for tax in accordance with the provisions of Explanation I to Section 11 5JB. It has been argued by the learned Counsel that had this been a case of deferred tax assets, the same would have resulted benefit to the revenue and the revenue cannot allow the assessee for not including such deferred tax assets while computing book profit under Section 115JB.
19. The learned Counsel in support of his above submission has relied on the various as already submitted before the Learned Commissioner (Appeals). He has also relied on the following decisions --
(i) Kakollu Subba Rao & Co. v. Union of India ;
(ii) Garden Silk Weaving Factory v. CIT ;
The learned Counsel has also relied on a recent judgment of Panaji Bench of Tribunal in the case of Salgaocar Mining Ind (P.) Ltd. v. Jt. CIT , wherein it was held that the Income Tax Act maintains a distinction between income-tax and interest as they are statutorily treated in different on senses and hence interest cannot be construed to be a part of the income tax, and for this reason, it is not possible to treat interest as part of income-tax and interest on income-tax clearly falls outside the scope of term 'income tax' as used in Explanation (a) to Sub-section (2) of Section 115JA. It has been submitted by the learned Counsel that in the present case also, deferred tax charge should be considered as different than income-tax paid or payable as the term income-tax paid and deferred tax charges have assumed, and acquired separate meaning and are to be understood distinctly and differently from each other.
It has, therefore, been submitted by the learned Counsel that it is clear from his submission that the deferred tax charge is not covered by any of the clauses of the Explanation to Sub-section (2) to Section 115JB and, therefore, is not required to be added back in the computation of book profit for the purpose of Section 115JB and, therefore, the assessing officer has erred in not accepting the assessee's claim regarding the same, which was rightly deleted by the learned Commissioner (Appeals) after perusing and considering the submission and the spirit of the Act in this regard. It has, therefore, been pleaded that the order of Commissioner (Appeals) is upheld.
20. We have given our careful consideration to the rival submissions made before, us and have perused the orders of tax authorities. We have also considered the material available on record, written submissions and the case laws cited before us. The revenue in this case has pleaded that deferred tax is actually provision for tax effect and is meant for formatting future tax liability. It has further been pleaded that it is not determined during the year and therefore, the same could not be said an ascertained provision. It has further been stated before us by the revenue that such deferred tax charge is nothing but the charge of income-tax, which is liable to be added in Explanation (a) to Sub-section (2) of Section 115JB or the same should be treated as an amount credit to reserve within the meaning of Explanation (b) to Sub-section (2) of Section 115JB. The assessee, on the other hand, has contended that deferred tax charge is ascertained liability and the same is created in accordance with Accounting Standard-22 issued by the ICAI, which is mandatory to be followed by all the assessees and is neither in the form of reserve as stipulated in Explanation (b) to Sub-section (2) of Section 115JB nor could be treated as income-tax paid or payable within the meaning of Explanation (a) to Sub-section (2) of Section 115JB, nor the same could be covered under Clause (c) of said xplanation as deferred tax charge is certainly an ascertained liability.
21. We after hearing both the parties find that much stress has been given on the adjustment as stipulated in Explanation to Sub-section (2) to Section 115JB and, therefore, find it convenient to first go through such Explanation which is being reproduced hereunder for the facility of reference:
For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section (2) as increased by-
(a) the amount of income tax paid or payable, and the provision therefore;or
(b) the amounts carried to any reserves, by whatever name called (other than a reserve specified under Section 33AC) or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities, or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which Section 10 or Section 10A or Section 10B or Section 11 or Section 12 apply-
If any amount referred to in Clauses (a) to (f) is debited to the profit and loss account, and as reduced by'
(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1-4-1997 (otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account:
Provided that where this Section is applicable to an appellant in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1-4-1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below second proviso to Section 115JA, as the case may be; or
(ii) that the amount of income to which any of the provisions of Section 10 or Section 10A or Section 10B or Section 11 or Section 12 apply, if any such amount is credited to the profit and loss account; or
(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.
Explanation-for the purposes of this clause'
(a) the loss shall not include depreciation;
(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation, is nil, or
(iv) the amount of profits eligible for deduction under Section 80HHC, computed under Clause (a) or Clause (b) or Clause (c) of Sub-section (3) or Sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or
(v) the amount of profits eligible for deduction under Section 80HHE computed under Sub-section (3) or Sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or
(vi) the amount of profits eligible for deduction under Section 80HHF computed under Sub-section (3) of that section, and subject to the conditions specified in that section, or
(vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under Sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Whereas in the instant case, the specified addition could be made to the net profit to arrive book profit as claimed by learned D.R., in any of three following claims of Explanation to Sub-section (2) to Section 115JB :'
(a) the amount of income tax paid or payable, and the provision therefore;
(b) the amounts carried to any reserves, by whatever, name called (other than a reserve specified under Section 33AC;
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.
Apart from the above provision of Explanation to Sub-section (2) of Section 115JB, both the parties have relied on the various provisions laid down under Accounting Standard 22 issued by the Institute of Chartered Accountants of India, which makes it mandatory in respect of all the enterpreneurs to follow such Accounting Standard while preparing their financial statement with effect from 1-4-2002. We, therefore, also find it convenient to deal with the various objectives and scope of such Accounting Standard-22.
22. The objective and scope for issuing of Accounting Standard-22 by ICA1 is quoted hereunder for the facility of reference:
Objective The objective of this Statement is to prescribe accounting treatment for taxes on income. Taxes on income is one of the significant items in the statement of profit and loss of an enterprise. In accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Matching of such taxes against revenue for a period poses special problems arising from the fact that in a number of cases, taxable income may be significantly different from the accounting income. This divergence between taxable income and accounting income arises due to two main reasons. Firstly, there are differences between items of revenue and expenses as appearing in the statement of profit and loss and the items which are considered as revenue expenses or deductions for tax purposes. Secondly, there are differences between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss and the corresponding amount which is recognized for the computation of taxable income.
Scope This statement should be applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.
Since the deferred tax charge is basically made on account of time difference, such time difference has been defined under Accounting Standard-22 in para 7 as under:
Timing differences are those differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods. Timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at accounting income. For example, machinery purchased for scientific research related to business is fully allowed as deduction in the first year for tax purposes whereas the same would be charged to the statement of profit and loss as depreciation over its useful life. The total depreciation charged on the machinery for accounting purposes and the amount flowed as deduction for tax purposes will ultimately be the same, but periods over which the depreciation is charged and the deduction is allowed will differ. Another example of timing difference is a situation where, for the purpose of computing taxable income, tax laws allow depreciation on the basis of the written down value method, whereas for accounting purposes, straight line method is used.
ICAI ide para-9 of Accounting Standard -22 under the caption 'recognition' has advised that tax expenses for the period comprising current tax and deferred tax should be included in the determination of net profit or loss for the period and vide paragraphs 20 to 22, it has laid down the procedure for measurement of such deferred tax charge which reads as under:
Measurement
20. Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws.
21. Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
22. Deferred tax assets and liabilities are usually measured using the tax rates and tax laws that have been enacted. However, certain announcements of tax rates and tax laws by the Government may have the substantive effect of actual enactment. In these circumstances, deferred tax assets and liabilities are measured using such announced tax rate and tax laws.
Whereas the presentation and disclosure has been mentioned in paragraphs 27 to 32 of the said Accounting Standard, which is reproduced hereunder :'
27. An enterprise should offset assets and liabilities representing current tax if the enterprise:
(a) has a legally enforceable right to set off the recognized amounts; and
(b) intends to settle the asset and the liability oA a net basis.
28. An enterprise will normally have a legally enforceable right to set off an asset and liability representing current tax when they relate to income taxes levied under the same governing taxation laws and the taxation laws permit the enterprise to make or receive a single net payment.
29. An enterprise should offset deferred tax assets and deferred tax liabilities if:
(a) the enterprise has a legally enforceable right to set off assets against liabilities representing current tax; and
(b) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.
30. Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities.
31. The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts.
32. The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.
23. Now we deal with various objections of revenue in deleting the addition made by the assessing officer. The first limb of arguments by the revenue is that the deferred tax charge to Profit & Loss A/c. is identical to the amount of income tax paid or payable and, therefore, the same is to be treated at par with Clause (a) to the Explanation to Sub-section (2) of Section 115JB. It has been submitted by the learned D.R. that the above deferred tax charge is nothing but is in the nature of income-tax, which is liable to be added in view of Clause (a) to Explanation to Sub-section (2) of Section 115JB. However, in our considered opinion, such objection raised by the department is devoid of any merit, as deferred tax means the tax effect of timing difference due to differences between taxable income and accounting income for a period that originate in one period and is capable of reversal and, therefore, such deferred tax charge is a provision for tax effect of difference between taxable income and accounting income and not provision for income tax paid or payable and, therefore, could not be covered under Explanation (a) to Sub-section (2) of Section 115JB. We have also noted down that paragraph 30 of Accounting Standard-22 clearly says that deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Panji Bench in case of Salgaocar Mining India (P.) Ltd. (supra) has also held that interest on income tax and income tax paid/payable are to be treated separately as they are separate and distinct from each other. Likewise deferred tax charge cannot be kept at par with income tax paid/payable as both are quite deferent. Apart from above fact, we have also noted down the objective behind enacting Accounting Standard-22 by the ICAI, as deferred tax charge was meant to remove the difference between taxable income and accounting income arising due to difference between items of revenue and expenses as appearing in the statement of Profit & Loss A/c. and the items which are considered as revenue expenses or deduction for tax purposes or there are difference between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss and the corresponding amount, which is recognised for the computation of taxable income. Therefore, it is absolute apparent that deferred tax charge could not be termed as income-tax paid or payable, which has to be paid out of the profit earned by the assessee for the year under consideration and, therefore, in our considered opinion, the first objection raised by the revenue does not hold any merit.
24. Coming to the second limb of objection by the revenue that such deferred tax charge is covered within Clause (b) to Explanation to Sub-section (2) of Section 115JB as the same is in the nature of reserve. However, such objection raised by the revenue is also devoid of any merit as there are many differences between the term. 'reserve' as stipulated in Explanation (b) to Sub-section (2) of Section 115JB and reserve created for the purpose of deferred tax charge. As reserve within the meaning of Explanation (b) can unilaterally be transferred back to the profit & loss a/c., whereas a deferred tax charge cannot be so transferred to the profit & loss a/c. Furthermore, the reserve mentioned in Clause (b) can be utilized for issuing bonus shares or for declaration of dividend, whereas deferred tax charge cannot be utilised for such purposes. It is also pertinent to note that as per Accounting Standard-22, deferred tax charge is treated as an expenses of the period in which it is charged, and such expenses cannot be treated as a reserve within the meaning of Clause (b) to Explanation to Sub-section (2) of Section 115JB. Though the learned DR has argued that such deferred tax liability should be treated at par with other reserve as the same has been debited to the profit & loss a/c. and all the conditions stipulated in the provision are fulfilled. However, such contention of the learned DR could not be accepted keeping in view our observation hereinabove while observing differences between the reserve as stipulated in Clause (b) to Sub-section (2) of Section 115JB and the reserve created for deferred tax liability. The guidelines of ICAI also advice to treat deferred tax charge separately than reserve as stipulated in Clause (b) to Explanation to Sub-section (2) to Section 115JB. We, therefore, dismiss this second limb objection raised by revenue while disputing the order of Learned Commissioner (Appeals).
25. The 3rd and last limb of objection by the revenue in this case is on account of considering such deferred tax liability to be covered under Clause (c) to Explanation to Sub-section (2) of Section 115JB contending that such amounts are unascertained liabilities. However, a close perusal of clauses as mentioned in paras 20 to 23 in Accounting Standard-22 makes it clear that such deferred tax charges are measured scientifically and as per restrict guidelines of ICAI issued time-to-time and are being accepted not only in India but globally. We have also noted down the fact that paras 30 and 31 of Accounting Standard-22 issued by ICAI (already reproduced elsewhere in the order) make it obligatory on the part of assessee to give break-up of deferred tax liability into major component of the respective balances in its notes of accounts which makes it clear that such deferred tax charges are being computed on scientific method and as per guidelines issued by the ICAI and the same is not in the nature of contingent liability or are made on estimate basis, which could result into unascertained liabilities. Since in the preset case also, the revenue has not disputed the calculation of such deferred tax charge by the assessee which has been made as per guidelines stipulated in Accounting Standard-22 by ICAI and the computation of deferred tax charge is scientifically made and globally accepted, the same could not be considered as an unascertained liability within the meaning of Explanation (c) to Sub-section (2) of Section 115JB. Moreover such calculation of deferred tax charge by the assessee has not been disputed by the revenue and such calculation of deferred tax liability has also been accepted as reasonable ascertained by learned D.R. while arguing the case for the department. We are, therefore, of the view that this third limb of objections raised by the revenue is also devoid of any merit.
26. Apart from rejecting the above three limb of objection by revenue, we have also noted down that any withdrawal from the provision for deferred tax liability would be offered for tax in accordance with the proviso of Explanation (i) to Section 115JB. Hence, the revenue would not be worse off (except the timing difference) if the deferred tax charge is not added back to arrive at the book profit. In case a deferred tax asset is created by crediting the profit and loss account, it would be considered as part of book profit and it would result in absurdity if provision for deferred tax liability (which is debited to the profit and loss account) is also added back to arrive at the book profit. In fact, there might be financial statements where there is a debit in the profit and loss account for a deferred tax charge (say Rs. 30) and simultaneously there is a credit for deferred tax asset (say Rs. 100). In such a case, the deferred tax asset of Rs. 100 would certainly be taxed. However, if the deferred tax charge of Rs. 30 is added back and also taxed, it would result in a clear-cut absurdity. Since it is a well settled rule of interpretation that rational construction must prevail over literal interpretation, if later lead to absurd results. We, therefore, are of the view that an interpretation which results in absurdity should be avoided.
27. We, therefore, in view of the above facts and circumstances involved in this case and after perusing material available on record and in the light of above discussion, are of the opinion that deferred tax charge is not covered by any of the clauses of the Explanation to Sub-section (2) to Section 115JB as objected by the revenue before us, and therefore, in our considered opinion, such deferred tax charge is not required to be added back in the computation of book profit for the purpose of Section 115JB and, therefore in our considered opinion, the learned Commissioner (Appeals) was justified in deleting the addition made by the assessing officer in not accepting the claim of the assessee on account of such deferred tax charge. We, therefore, uphold such order of learned Commissioner (Appeals) in this regard and reject the ground raised by the revenue.
28. Ground Nos. 4, 5 & 6 by the revenue relate to the order of learned Commissioner (Appeals) in directing the assessing officer to allow tax paid under Section 115-O of the Income Tax Act on distributed dividend to determine book profit.
29. The assessing officer in this case has refused to entertain the claim of the assessee that the tax on dividend distributed under Section 115-O should be deducted from the net profit for determining book profit for MAT under Section 115JB.
30. In appeal, the learned Commissioner (Appeals) has allowed such claim of the assessee observing that Circular No. 8 dated 29-8-2005, in which it was held that fringe benefit tax is an allowable deduction in the computation of book profit under Section 115JB of the Income Tax Act, and the learned Commissioner (Appeals) has agreed with the submission of the assessee before him that the tax on profit distributed as dividend has to be treated in a similar manner as fringe benefit tax and is not to be added back in the computation of book profit for the purpose of Section 115JB.
31. The revenue is aggrieved with such order of learned Commissioner (Appeals) and has now come in appeal before us on the abovementioned ground Nos. 4 to 6.
32. In appeal before us, the learned Departmental Representative for the revenue assailing the order of learned Commissioner (Appeals) has contended that the claim of the assessee is completely outside the purview of adjustment for the purpose of book profit under Section 115JB. He has further rebutted the observation of learned Commissioner (Appeals) in holding that dividend tax is to be treated at par with fringe benefit tax and later being an allowable deduction for the purpose of book profit under Section 115JB. It has been submitted by the Learned D.R. that fringe benefit tax is a tax on expenditure whereas the dividend tax is out of appropriation able surplus profit. Therefore, the dividend tax is basically a capital expenditure and cannot be allowed as deduction.
33. It his rival submission, the learned Counsel for the assessee has relied heavily on the order of learned Commissioner (Appeals) and has submitted that book profit as per under Section 115JB is to be determined taking into account the net profit i.e., the profit as arrived at after deducting all expenses, taxes, deferred tax, etc. Therefore, net profit for the computation of book profit as per Section 115JB shall be after deducting the said tax on profit distributed as dividend paid by the company. It has further been contended by the learned Counsel that such payment is not covered under Clause (a) to the Explanation of Sub-section (2) of Section 115JB as tax on profit distributed does not fall within the purview of income-tax paid or payable, as envisaged in the Explanation. It has been submitted that tax on profit distributed as dividend cannot be treated as income tax due to the fact that income tax is payable on the income earned by the assessee, whereas tax on dividend is application of income on which income tax has already been paid. The learned Counsel has thereafter relied on Circular No. 8 by Central Board of Direct Taxes dated 29-8-2005, in which CBDT while dealing with question No. 103 of the Circular has made it clear that fringe benefit tax is an allowable deduction in the computation of book profit under Section 115JB. The learned Counsel for the assessee has submitted that tax on distribution of profit is identical to fringe benefit tax as both are payable at the time of incurring certain expenditure and, therefore, the learned Commissioner (Appeals) was justified in deleting the addition made by assessing officer following the above Circular. It has, therefore, been pleaded that the order of learned Commissioner (Appeals) be upheld in this regard.
34. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the learned Counsel for the assessee, written submissions by the learned DR and the Circular No. 8 dated 29-8-2005 issued by the Central Board of Direct Taxes. The revenue in this case has objected to the claim of the assessee that tax on dividend distributed under Section 115-O should be deducted from the net profit for determining book profit under Section 115JB. It has been contended by the learned D.R. that tax on distributed profit could not be treated at par with fringe benefit tax and, therefore, the action of learned Commissioner (Appeals) in directing the assessing officer to allow such claim is not correct.
35. In this case, as per the objection of revenue the specified addition to be made to the net profit to arrive at book profit on which the tax on profit distributed as dividend to the profit and loss account can be covered under Clause (a) to the Explanation to Sub-section (2) of Section 115JB. However, observing the nature of payment, we are of the considered opinion that such tax on distributed profit as dividend could not be covered under the said clause as there are basic fundamental differences between income tax paid or payable and tax on profit distributed. Since income tax is payable on the income earned by the assessee, tax on dividend as per the provision of Section 115-O is paid at the time of distribution of profit in the form of dividend i.e., at the time of application of the income on which income tax has already been paid. Furthermore as per Sub-section (2) of Section 115-O makes it clear that tax on distribution of profit has to be paid by a domestic company even if no income tax is payable in the year in which dividend is distributed by the company. We have also considered the order of Tribunal, Panaji Bench in the case of Salgaocar Mining Ind. (P.) Ltd. (supra), wherein interest on income tax was excluded from the said clause as both were to be treated separately. Since in the present case also, tax on distributed profit is different than income tax payable, the same cannot be covered under Clause (a) to Explanation to Sub-section (2) of Section 115JB.
36. So far as the action of learned Commissioner (Appeals) in deleting the addition following the Circular No. 8 dated 29-8-2005 by CBDT, in our considered opinion, such action of learned Commissioner (Appeals) was based on the correct appreciation of the spirit of the Circular. In our considered opinion on distribution of profit payable as per provision of Section 115-O of the Act is of similar nature as fringe benefit tax payable under Chapter XII-H of the Act, since both are payable at the time of incurring certain expenditure which is in the form of fringe benefit given to employees or dividend to shareholders which are not otherwise taxable under the other provisions of the Act. Therefore, in our considered opinion, both fringe benefit tax and tax on distribution of profit are similar in nature. Since Circular No. 8 dated 29-8-2005 issued by the CBDT makes it clear that fringe benefit tax is an allowable deduction in the computation of book profit under Section 115JB of the Act while dealing in question No. 103, a copy of which is also available on record, in our considered opinion, the learned Commissioner (Appeals) has rightly treated the tax on profit distributed as dividend in similar manner as fringe benefit tax and has thereafter rightly directed the assessing officer not to add back such tax on distributed profit in the computation of book profit for the purpose of Section 115JB. We, therefore, do not see any reason to interfere with such order of learned Commissioner (Appeals) and accordingly uphold his order and reject the grounds raised by the revenue.
37. In the result, the appeal filed by the revenue is dismissed.